RISK AND RATES OF RETURN

Explain the positive relationship between risk and return..

Interpret standard deviation and probability distributions as a measure of risk.

Explain diversifiable (business-specific or unsystematic) risk versus non-diversifiable (systematic) risk..

Interpret correlations between investments and explain how basic diversification works..

Explain and interpret beta (β) for an individual security and for a portfolio..

Calculate portfolio beta (β) given the betas and weightings of individual securities..

Calculate expected return, E(r), for a stock using the CAPM formula..

Calculate portfolio expected return given the returns and weightings of individual securities..

Relate the CAPM formula to the Security Market Line (SML) and explain what the SML shows..

Explain how inflation affects the SML..

Explain how changes in investor risk aversion (MRP) affects the SML..